March 26, 2007
Google’s CPA Experiment: The Search Insider Weighs In

So the search marketing blogosphere has been bubbling following Google’s March 20th announcement that they are launching a new pay-per-action beta test. After several days of internal debates, conversations with our friends at Google and some deep meditation, the time feels right to weigh in with my thoughts.

First, the quick summary to catch you up: Google announced that they are beginning a beta test of an advertising model where advertisers only pay when a specified action is complete, such as a sale of a product, a form filled out or a newsletter subscribed to, for example. The advertiser sets a price and only pays when said action is completed. For the beta, this test is not running on Google.com or the search network, only on the content/adsense network, and only for a limited number of publishers (website owners) and advertisers. Advertisers create their “offer” and publishers are selecting the offers that they want to run on their site, based on the payout, the demographic or topical connection. In other words, they are picking the advertiser’s offer that they think will help make them the most money on their site.

This limited test is not very exciting to us primarily due to the limitation of it contained to the content network, which we use for only a small percentage of our client’s budgets. However, it should be very scary to the affiliate networks such as Commission Junction and Linkshare, because Google is acting as the intermediary connecting advertisers and publishers. With their reach and technical prowess, I don’t think anybody doubts that they could become overnight players in the affiliate network marketplace if they make this a strategic push. Granted, there are some major issues to over come such as handling chargebacks and while click-fraud becomes a moot point, lead fraud and purchase-and-return fraud all become new beasts to tackle. But give Google credit: if Commission Junction has the resources to address these issues, Google certainly does as well.

Where things get abundantly more interesting is if and when Google starts running these CPA or PPA ads alongside their pay-per-click ads on Google.com and their search network. This sort of move would be very large for Google, and one that will need to be handled with extraordinary care, because the last thing Google wants to do is harm in any way the $10 billion in revenue per year they make from PPC advertising.

Google will not ever move to a purely CPA-based model, which means that they need a system capable of ranking PPC and CPA ads alongside each other to maximize each piece of ad real estate on their lucrative search results pages. The model would be something like this: Right now it might cost $1 per click for a given spot in the paid search results generating real estate leads. If a CPA ad comes along, and the conversion rate is 10% (1 in 10 visitors to the website fill out the form in question), the CPA advertiser would need to bid $10 per lead to come up in the same position as the $1 PPC link, so that there is parity in the estimated value per ad spot from Google’s perspective. At this point, while it is abundantly attractive to advertisers to just name a value per lead, in this particular example the advertiser ends up paying the same per lead whether they are on a PPC model or CPA model. I imagine that advertisers will have a bit of a rude awakening when they “name their price” but suddenly don’t see the positioning and therefore volume they used to.

I consider this somewhat analogous to Google’s long running — and from all appearances failing — attempt at integrating pay-per-call ads in their search results. To many advertisers, a call from a client *is* a conversion. And right now, I can go create an ad that instead of linking to my website, connects a phone call between the user on the search results page and myself. I bid on the call much the same way that we would bid on the CPA model. Google turns around and ranks the ads in a similar fashion to what I described above, where the cost bid per call and the call conversion rate is combined to rank PPC and pay per call ads according to the highest value per ad spot. What ends up happening is that the rosy idea of paying only for calls means that to come up high in the results, we needed to bid much larger amounts than we wanted to keep the high position ($50, $60 or more). At rates like that, we opt to just pay for the click and let our website sell the client and motivate them to pick up the phone.

Either way, I applaud the move on Google’s part, and I can’t wait to see what develops from it. However, I do not see an impending drastic change in the way that the majority of advertising dollars are spent. In other words, PPC is hear to stay.

Now one last piece of food for thought… Let’s assume that Google decides CPA model is the future, and it attacks all of the many problems that could plague a massive CPA marketplace. In theory, given the perfect system, Google in one swoop could replace every affiliate marketplace as well as the hundreds or thousands of performance or affiliate marketers (including Wpromote’s own performance marketing division) that make money by buying paid search ads on a PPC basis and making an arbitrage profit between that cost and the CPA or percentage of sales that they generate for their merchant partners. In theory, by running CPA ads directly on Google, they could increase their revenue by the aggregate amount of arbitrage profit and affiliate network cut currently being made in the marketplace. That is a big number, and that knowledge could serve as a pretty big motivation for a company like Google that will be looking at all possible revenue sources to keep up it’s torrid growth pace. Do I think this is on the horizon? No. But from what I’ve seen with Google’s massive development and growth in the past several years, I would not put it past them; if this has occurred to me, it certainly is being evaluated up in the Googleplex.